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Risk Management for the Rest of Us

We are at risk from birth. From the air we breath to the food we eat to crossing the street, driving a car or finding a partner we take chances in everything we do however unconsidered or seemingly trivial. Risk is endemic to all living things, no more so than in the animal kingdom where threats and predation are a daily constant and some creatures, such as birds, sleep with one eye open in order to better manage risk. Talk about paranoia…(and you think we have it bad.)

In a sense, it is that same paranoia that caused the insurance industry to form. The fear of losing something of value inspired the idea of protection against that loss by paying a fee, with the fee predicated upon the probability of a loss occurring. As time went on the evaluation of that likelihood became more sophisticated, giving rise to a complex world of actuarial calculations, large data sets and computer analysis.

Regrettably however, there are few computer models to help guide the individual. The decisions we make and the life choices we take all lead down paths often unknown and ill-considered, their ultimate outcomes unrealized until we finally arrive at (often) a destination we never planned. Sooner or later we look around and ask: How did I get here?

The truth is, we could all use a personal actuary.

This writer has always asked why they don't teach Life 101 in school. The curriculum would be easy to assemble - simply accumulate that familiar list of common human mistakes and impress them on young minds. Start saving early, but don't get married too early. Exercise self-discipline. Set goals and stick to them, don't jump from one thing to the next. And so on. Surely these basic life lessons would mitigate against the bad decisions we inevitably make and perhaps smooth some of the bumps in our journey.

Nevertheless, we tend to learn the hard way, mostly, just as the early actuaries did, and decisions made by the individual are their own regardless of rational consideration. Fortunately for industry the signposts are more evident and clearer to read. They are better considered and controlled. We can price risk and place our bet. We understand the probability of outcomes with somewhat more certainty. As available data and technology continues to improve the measurement of certainty even Black Swan events will continue to diminish. This is all good.

Bridging the gap between personal and corporate risk management may seem a stretch, but taken to its logical conclusion would yield benefits to both parties. The development of personal views on how losses occur, and the validity of preventing or reducing those loses, will not only serve to improve the quality of individual lives, it will identify the person as a risk taker or risk avoider, useful information to have when industry is grooming the next generation of risk managers.

As for the animal kingdom, well, I'm sitting here looking outside my office window on this cold and rainy Fall day. Thousands of blackbirds are forming a flock in the parking lot, about to begin their annual trek south. Some surely will not survive the trip, a fact they do not know or could even consider. Their risk is programmatic, burned into their behavior, without choice. Our lot is different – we have choice, we just have to better learn what is the best one.